China's Reforms Accelerate, Deposit Rates to Be Freed

China will allow banks to set the interest rates to pay on bank deposits within two years, central bank governor Zhou Xiaochuan said in a media conference on 11 March. The People’s Bank of China currently caps the interest rate on one-year deposits at no more than 3.3%.
“Deposit rate liberalization is on our agenda,” Zhao said, according to the Asian Wall Street Journal. “I personally think it’s very likely to be realized in a year or two.” Chinese officials had previously been vague about the timing of the reform.
“Zhou’s comment is the clearest message to date on the timeline of interest rate reforms,” wrote Bank of America Merrill Lynch in a report. Internet finance companies like Alibaba and non-bank institutions that offer wealth management products already offer much higher rates. The banking system could be at risk if consumers pull out too much of their deposits with the banks.
Bank of America believes the overall impact on the economy will be positive because “market-determined interest rates will more efficiently allocate precious capital.” However, the next interest margins of some big banks could be squeezed, although the better managed banks may be able to seize the opportunity and expand their client base.
Some state-owned companies may have to pay higher interests on loans, said the bank, and “earn less on arbitraging,” but the impact on the majority of borrowers “could be rather small.” The winners will be the ordinary Chinese savers, along with corporates that currently park their money in low-return demand deposits.
Interest rates on corporate loans will almost certainly rise, but if the central bank and other regulators manage the shift correctly, they may “gradually stabilize as the market reaches the balance for supply and demand.”


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